# Profit Margin Magic - Using Op Efficiency to drive profitability

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Dirty little start-up secret #7 OPERATIONS EATS SALES FOR BREAKFAST! http://www.flickr.com/photos/matthew_norris/

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too many entrepreneurs get hypnotized by growth ( volume or revenue)

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when what really matters is margin

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BUSINESS MODEL 1 Units Sold 1,000,000 Price per unit \$1 Monthly Revenue 1,000,000 Monthly Cost 990,000 Monthly Profit 10,000 Profit Margin 1% BUSINESS MODEL 2 Units Sold 100,000 Price per unit \$1 Monthly Revenue 100,000 Monthly Cost 50,000 Monthly Profit 50,000 Profit Margin 50% a million in revenue for a million units sold doesn’t look so sexy now, does it?

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so how do we maximize margin

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well it starts with some very basic math

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profit margin = profit revenue

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now let's do some simple algebraic substitution

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margin = profit revenue = ( volume x price ) – cost volume x price = revenue – cost revenue = (volume x price) – ( volume x unit cost ) volume x price Expand out profit to (r - c) Expand out revenue to (v x p) Expand out cost to (v x c)

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margin = = = = (volume x price) – (volume x unit cost) volume x price volume x (price – unit cost) volume x price price – unit cost price From the last slide Simplify! price price unit cost price -

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margin = = From last slide price price unit cost price - unit cost price 1 - holy [email protected] !

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profit margin =~ unit cost price 1 -

in other words

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selling more units (volume), does not in itself mean your business is healthier

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what moves the dial is… raise price lower costs

but….

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in most competitive markets, raising price (especially significantly) is not an option

which means that

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the magic of margin

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is all done with cost per unit

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that’s why sales & marketing is basically illusion and hypnosis

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while operational management is the dirty little secret of success

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so how do you reduce unit cost?

simple

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process excellence

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and how do you get excellent with your processes?

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you map out where your processes are weak or inefficient

and you fix them

one at a time

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i’d now like to share with you a tool that would be used by you and your management team

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to identify areas to target

but

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due to the limitations of slideshare , you must download this deck to make the tool work

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here is a tiny version of what you’ll find on the next slide WARNING: you must manually use the scroll bars in order to use it

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Cultivate Productive Assets Produce Product / Service Distribute Product / Service Administrate Firm Operational Activities are defined as a set of business processes required to execute business strategy. Not all firms will have the same activities but they probably all have the same core of 4 and most start-ups and small companies will not be all that far off. As a small company, you won’t have time to fix everything, but you should 1) know where you stand in terms of operational maturity (by mapping out processes as is the case here, and assigning maturity ratings) and 2) have a plan as to what things you will invest in improving. For example, you might target the “red” items in the map. Or you might find that you’ll get better ROI by focusing on 4 of the yellow processes. Whatever the case, this is an example map (scroll left, right, up and down to explore) of operational processes that seem generic enough to me that they might be useful as a baseline for whatever company you are running. Activities mature and working smoothly Activities are being performed, but there are opportunities to improve efficiency and/or effectiveness Activities are not being performed, but should be Activities are not being performed, but are not relevant for our business at this time Scroll to see processes! Scroll to see more!

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what you need to do now

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is duplicate this map with processes specific to your business (I bet I nailed 86% of them though) 

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and, as a management group activity, use color post-it notes

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to map out your own maturity levels

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then, start actioning change

but remember…

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focus on change that moves the dial on cost per unit

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don’t geek out on every opportunity….

good luck!

and make it fun!